What Lies Behind The Entry Of Hudson Into The Capital Of Deutsche Bank?

What lies behind the entry of Hudson into the capital of Deutsche Bank?

The share price of Deutsche Bank has risen + 9% since 26 October. This reaction is explained by the entry of Hudson since the results for Q32018 were unconvincing and the reaction to the stress tests did call attention. The US hedge fund Hudson Executive Capital has invested 550 M€ to take control of 3.1% of the capital – equivalent to 8.6€/share. Hudson thus becomes the fourth largest shareholder behind the Chinese group HNA (7.6%), a Qatari fund (6.1%) and Blackrock (5%).

Hudson is headed by a former JP Morgan Financial Director and appears to want to remain in DB for the long term where it aspires to triple its investment over the next few years (3/5 years?). Hudson’s entry in Deutsche Bank is a vote of confidence in the new CEO and the strategic plan, as well setting a floor for the bank´s share value. DB is in the process of restructuring and so it is logical to expect a subsequent recovery which will be accompanied by valuation multiples better than now.Hudson appears to intend to remain in the long term and aspires to triple its investment (3/5 years?).

Bankinter´s analysts value Deutsche Bank at 12€/share, and believe that this pivots on the bank’s fundamentals and strategic plan. This does not take account of possible corporate operations. They also point out that Deutsche Bank has a high revaluation potential (›30.0%) and the fundamentals (net book profit and capital) are moving in a good direction towards 2018/19.

What would Hudson be expecting? Bankinter´s experts assume a recurrent net book profit of 3.340 billion € in 2021 – once the objectives of the strategic plan have been achieved.

“With these figures Deutsche Bank should increase its stock market capitalisation by ~34.5 billion € – equivalent to 25.8€/share. In this scenario, DB should meet one of various of the following conditions: experience a strong expansion in its valuation multiples (re-rating) and begin listing from 0.34 times the tangible book value at 0.96X and/or achieve a recurrent net book profit of 6.165 billion (somewhat less than the net book profit achieved in 2007). This scenario is equivalent to obtaining a sustainable RoTE of 11.1% (compared to ‹2.0% now).

“What other factors could explain such a generous expansion in multiples? Basically two: (i) un generalised re-rating of the sector and/or (ii) participate in a corporate operation (M&A) which could take place at domestic level – Commerzbank? – or cross border.”

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.